Chapter 16

94. Which of the following is NOT a retail banking service? A. Check deposit services. B. Point of sale/debit cards. C. Telephone bill paying services. D. Pre-authorized debits/credits. E. Automated teller machines.

A. Check deposit services.

53. How can noninterest operating expenses of an FI be reduced by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

A. By improving the efficiency of management of information flows.

92. Which is the most important banking area in which technology has had an impact? A. Cash-management services. B. Residential mortgage lending. C. Issuance of certificates of deposit. D. Credit approval. E. None of the above.

A. Cash-management services.

80. As of January 2012, which of the following represented the highest percent of the dollar value of noncash transactions in the United States? A. Checks. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers.

A. Checks.

63. Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically? A. Electronic data exchange. B. E-commerce facilitation. C. Electronic billing. D. Electronic funds transfer. E. Account reconciliation.

A. Electronic data exchange.

65. Which of the following partially explains why cash management services have not attracted customers in Europe to the degree that they have in the US? A. Prevalence of nationwide branching and banking in Europe. B. Prevalence of interregional banking restrictions in Europe. C. Prohibitive charges imposed for the use of domestic telephone lines in Europe. D. Prohibitive charges imposed on such services in Europe. E. None of the above.

A. Prevalence of nationwide branching and banking in Europe.

75. Which of the following best describes economies of scale? A. The average cost of production decreases as the level of output increases. B. The effects on costs related to managerial ability and other hard-to-quantify factors. C. Cost savings are realized from using many of the same inputs to produce multiple products. D. The average cost of production increases as the level of output increases. E. Cost increases are realized from using many of the same inputs to produce multiple products.

A. The average cost of production decreases as the level of output increases.

69. Large-scale investment projects that lead to excess capacity and integration problems that create cost overruns and control problems are examples of A. diseconomies of scale. B. economies of scale. C. economies of scope. D. diseconomies of scope. E. constant returns to scale.

A. diseconomies of scale.

88. On Fedwire, daylight overdraft A. is a bank's positive intraday balance in its reserve account at the Fed. B. does not occur under the current payments system. C. invites a fee is 50 basis points, quoted as an annual rate on the basis of a 24-hour day. D. has a seasonal component. E. is not a potential source of instability in the financial markets.

A. is a bank's positive intraday balance in its reserve account at the Fed.

60. As banks have increased the use of technology over the past 20 years, A. noninterest income as a percent of total operating income has approximately doubled. B. there has been a decrease in the importance of both Fedwire and CHIPS. C. there has been an increase in negative net present value because of the speed in which rivals can replicate innovations. D. banks no longer need to consolidate because they can access customers worldwide through internet services. E. noninterest expense as a percent of total operating income has decreased as supporting branch banking has decreased in importance.

A. noninterest income as a percent of total operating income has approximately doubled.

86. Settlement risk is important because A. of the interdependent nature of many international transactions. B. of the impact on sovereign country risk. C. problems may induce countries to limit the freedom of international capital flows. D. the electronic funds transfer network itself may become insolvent. E. the Fed's guarantee may prove to be even more costly to the Federal government than the thrift debacle.

A. of the interdependent nature of many international transactions.

54. How can interest expense of an FI be reduced by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

B. By obtaining access to low cost sources of funds.

70. Which of the following implies that small FIs are more cost efficient than large FIs, and that in a freely competitive environment for financial services, small FIs may outperform their larger counterparts? A. Economies of scale. B. Diseconomies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

B. Diseconomies of scale.

67. Which of the following implies reduced unit costs as size or volume of assets increases? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale

B. Economies of scale.

87. Daylight overdrafts occur when A. FIs in different time zones clear transactions. B. FI debits exceed credits during the day. C. FI credits exceed debits during the day. D. the sum of all debits transmitted over the system exceed the sum of all credits during the day. E. the sum of all credits transmitted over the system exceed the sum of all debits during the day.

B. FI debits exceed credits during the day.

72. According to studies, which of the following may better explain cost differences and operating cost efficiencies among FIs? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. X-inefficiencies. E. Diseconomies of scope.

D. X-inefficiencies.

79. Which of the following statements is NOT true? A. The Federal Reserve operates the Fedwire electronic payments system while CHIPS is a private network. B. Fedwire is used to transfer funds from the Fed to the banking system while CHIPS is used to make interbank funds transfers. C. The Fed guarantees all payments on Fedwire while CHIPS transfers are provisional until settlement. D. Large daylight overdrafts are incurred on both Fedwire and CHIPS. E. Fedwire has a fee for daylight overdrafts but CHIPS does not.

B. Fedwire is used to transfer funds from the Fed to the banking system while CHIPS is used to make interbank funds transfers.

77. Which of the following observations concerning the production approach to measure the cost function of FIs is true? A. It views FIs' outputs of services as having three underlying inputs. B. Labor and capital are the only inputs. C. It views the output as being produced by labor, capital and the funds used to produce intermediated services. D. Deposit costs are viewed as an input in the banking and thrift industries. E. None of the above.

B. Labor and capital are the only inputs.

59. The expenses relating to increased technological improvements made by FIs during the last several years has the most impact on which of the following? A. Interest expense. B. Noninterest expense. C. Net income. D. Provision for loan losses. E. Net securities gains or losses

B. Noninterest expense.

74. Which of the following best describes/defines X-inefficiencies? A. The average cost of production decreases as the level of output increases. B. The effects on costs related to managerial ability and other hard-to-quantify factors. C. Cost savings are realized from using many of the same inputs to produce multiple products. D. The average cost of production increases as the level of output increases. E. Cost increases are realized from using many of the same inputs to produce multiple products.

B. The effects on costs related to managerial ability and other hard-to-quantify factors.

66. As banks and other FIs increase the use of technology, an unintended consequence may be that A. cost savings are seldom realized. B. customers are driven away because they still want to interact with a person for certain transactions. C. innovation of new products tends to take longer periods of time to attract new customers. D. the marginal cost of adding new customers tends to increase at an increasing rate. E. None of the above.

B. customers are driven away because they still want to interact with a person for certain transactions.

91. Which of the following is consistent with economies of scope? The subscript "b" refers to a banking firm, "s" for a securities firm, "AC" is average costs and "TC" is total costs. A. ACb + s > ACb + ACs. B. ACb + s = ACb + ACs. C. ACb + s < ACb + ACs. D. TCb + s < TCb + TCs. E. TCb + s > TCb + TCs.

C. ACb + s < ACb + ACs.

58. Which of the following occur when managers undertake growth-oriented investments to increase an FI's size that may be inconsistent with stockholders' value-maximizing objectives? A. Technology risk. B. Operational efficiency. C. Agency conflicts. D. Diseconomies of scale. E. Diseconomies of scope.

C. Agency conflicts.

52. How can noninterest operating income of an FI be increased by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

C. By linking services to the quality of the FI's technology.

68. Which of the following implies reduced unit costs as the range of products offered increases inputs in producing multiple products? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

C. Economies of scope.

90. Why has empirical evidence on economies of scale and scope been so contradictory? A. Data on bank costs are unavailable. B. Efficiency may be related to overall market conditions. C. Efficiency may be related to non-quantifiable variables such as managerial ability. D. Neither the intermediation nor the production approach conform to reality. E. The methodology to detect economies of scale and scope are still very rudimentary.

C. Efficiency may be related to non-quantifiable variables such as managerial ability.

64. Which of the following wholesale services offered by FIs to businesses allows the FI to combine the e-mail capabilities of the internet with the FIs ability to process payments electronically through the interbank payment networks? A. Electronic data exchange. B. E-commerce facilitation. C. Electronic billing. D. Electronic funds transfer. E. Account reconciliation.

C. Electronic billing.

78. Which of the following observations concerning the intermediation approach to measure the cost function of FIs is true? A. It views FIs' outputs of services as having two underlying inputs. B. Labor and capital are the only inputs. C. It views the output as being produced by labor, capital and the funds used to produce intermediated services. D. Premiums or reserves are viewed as an input in the banking and thrift industries. E. None of the above.

C. It views the output as being produced by labor, capital and the funds used to produce intermediated services.

85. Which of the following observations is NOT true? A. The use of electronic methods of payment is far higher in major developed countries other than the United States. B. E-money payments are virtually nonexistent in the United States. C. Money stored in e-money accounts and cards is covered by deposit insurance. D. U.S. FIs have been slow in adopting and using online banking and electronic payment methods extensively. E. All of the above.

C. Money stored in e-money accounts and cards is covered by deposit insurance.

76. Which of the following are the two basic approaches to analyzing the cost functions of FIs? A. Basic indicator approach and standardized approach. B. Standardized approach and advanced measurement approach. C. Production approach and intermediation approach. D. Basic indicator approach and advanced measurement approach. E. Intermediation approach and advanced measurement approach.

C. Production approach and intermediation approach.

73. Which of the following best describes economies of scope? A. They occur when the average cost of production decreases as the level of output increases. B. They are effects on costs related to managerial ability and other hard-to-quantify factors. C. They occur when cost savings are realized from using many of the same inputs to produce multiple products. D. They occur when the average cost of production increases as the level of output increases. E. They occur when cost increases are realized from using many of the same inputs to produce multiple products.

C. They occur when cost savings are realized from using many of the same inputs to produce multiple products.

61. What is float? A. Overnight payments via CHIPS or Fedwire. B. Encoding, endorsing, microfilming, and handling customers' checks. C. Time it takes a check to clear at a bank. D. Management of multiple currency and security portfolios for trading and investment purposes. E. Interval between the dispatch of a bill and actual payment by the consumer.

C. Time it takes a check to clear at a bank.

55. How can interest income of an FI be increased by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

D. By innovating new interest earning products.

71. Which of the following occurs if the costs of joint production of FI services are higher than they would be if they were produced independently? A. Economies of scale. B. Diseconomies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

D. Diseconomies of scope.

89. Suppose that the doubling of a bank's deposit funding allows the bank to triple its loan output. What can you conclude about the bank's production technology? A. It exhibits economies of scale using the production approach. B. It exhibits diseconomies of scale using the production approach. C. It exhibits diseconomies of scale using the intermediation approach. D. It exhibits economies of scale using the intermediation approach. E. It exhibits neither economies nor diseconomies of scale.

D. It exhibits economies of scale using the intermediation approach.

57. Which of the following are potential benefits of technology for an FI? A. Improved service quality, especially for customers of large banks. B. The rate of innovation of new products can be increased. C. FIs can more easily cross-market new and existing products to customers. D. Improved flexibility in financial transactions for retail customers. E. All of the above.

E. All of the above.

93. Which of the following is NOT a wholesale banking service? A. Controlled disbursement accounts. B. Account reconciliation. C. Electronic funds transfer. D. Electronic initiation of letters of credit. E. Automated teller machines.

E. Automated teller machines.

84. Which of the following observations concerning e-money is NOT true? A. Check writing lays the foundation of e-money. B. E-money removes the middleman from a transaction. C. The e-money user transfers the money from his or her bank account to the account of the funds' receiver. D. The primary function of e-money is to facilitate transactions on the Internet. E. E-money is not a cost efficient way of managing transactions that are small in value.

E. E-money is not a cost efficient way of managing transactions that are small in value.

56. Which of the following is NOT a source of operational risk for an FI? A. Capital assets. B. Customer relationships. C. Technology. D. Employees. E. Positive duration gap.

E. Positive duration gap.

62. Which of the following is a centralized collection service for corporate payments that helps reduce the float? A. Funds concentration. B. Electronic billing. C. Treasury management. D. Controlled disbursement accounts. E. Wholesale lockbox.

E. Wholesale lockbox.